U.S.A. - The emergence of the mega-arcade chain over the past decade has transformed the location-based entertainment market into a virtual survival of the fittest, raising the bar significantly in the battle for the entertainment dollar.

While there's no doubt that such chains as Dave & Buster's, Jillian's, Namco Cybertainment, GameWorks and ESPN Zone have painted the coin-op industry in a positive light by taking the arcade concept to new heights, collectively they also have raised consumer expectations to an all-time high.

This trend is almost certain to continue.

The latest example is Bar Code/Galactic Circus, a glittering, $16 million facility that opened its doors last year in New York City's Times Square. The two-level, 22,000-sq.-ft. facility boasts a fully licensed high-tech bar, neon-lit pool tables and deluxe video games along with live DJs, a state-of-the-art sound system, a specialty food and drink menu, a midway, a redemption center and roving entertainers.

To put it simply, it is breathtaking.

And while $16 million may seem excessive, the Melbourne, Australia-based company behind it, Entertainment Development Group, understands that such largess is necessary in order to compete in today's competitive high-tech entertainment marketplace.

While these chains continue to expand, the fact remains that the vast majority of arcade locations in the U.S. are still local, mom-and-pop-type operations. With the rise of the mega-arcade chains, all indications are that smaller locations are under more pressure than ever before, with many struggling to survive under such difficult circumstances.

According to George Smith, president of the International Association for the Leisure and Entertainment Industry, which was originally established in 1993 to represent local family entertainment centers, the "small guys" are facing difficult times.

"They have not seen it tougher than it is right now , it's a case of the strong getting stronger in the market and the weak, well, they're going away," he said. "The problem is that there are a lot more places where people can spend their money, so the challenge is to try to become unique in the marketplace and survive economically."

Even the national chains, Smith said, are not immune to the struggle over the entertainment dollar.

"That's true whether you're a national chain or a mom-and-pop, because the American consumer has so many options right now that there's very few products that are unique anymore," he said. "It's a problem that everyone has to deal with right now."

MONEY TALKS

With major corporations like Disney having entered the scene with Disney Quest and ESPN Zone, Smith emphasized that quality standards have been raised to an all-time high.

"It's raised the bar significantly because the customer has probably seen something of very high quality at some point in time," he said. "If you are poorly capitalized right now trying to open up a place that's 20,000 to 40,000-sq.-ft, you're going to have a very difficult time because you need to compete at a very high quality level."

It is simply not realistic, however, for smaller locations to compete with such multi-billion dollar corporations as Disney.

Today's economic model, Smith pointed out, almost demands that locations have capital at their disposal.

"You need to be able to reinvest because you have to constantly re-invent yourself, and if you don't have the money to do that, the tide is going to pass you by." he said.

Capital alone, however, does not guarantee success. Smith noted that some well-heeled LBE operations fail because they lack an understanding of the business. A prime example was Discovery Zone, which had more than enough capital but lacked a clearly thought-out business plan, he said.

"It was an idea that they didn't think through to the end," he said. "If your single attraction is softplay that you're charging for, and you can go to a local McDonald's or dozens of other places to get the same entertainment for free, you've probably worked yourself into a bad niche. The big softplays were only exciting for a short period before they were imitated in a host of locations."

'Crank' Comments

EAST BRUNSWICK, NJ , Today's LBEs contront a significant level of competition from many direct and indirect sources compared with the video arcades of the 1980s, says past-AMOA president Frank "The Crank" Seninsky. Seninsky's company, Alpha-Omega Amusements, has provided consulting services to a number of LBEs, including Bar Code/Galactic Circus.

"Maintaining a fresh appearance has become the main priority, as the visitation frequency of the local population is much higher than, say, an amusement or theme park," he said. "Those facilities that establish an effective attraction reinvestment and rotation plan are able to maintain or increase market share, while stagnant facilities are seeing revenue erosion and reduced customer satisfaction levels."

The escalating price of land and associated building development, he explained, has put increased pressure on LBE bottom lines. To counter these effects, Seninsky noted that many facilities find themselves having to charge above-market prices, which in turn can damage the patron's sense of perceived value.

"As we stand today, our firm has observed niche markets, such as the children's and adult venue styles, reporting strong results," he said. "Now, more than ever, both new and existing facilities can benefit from the experiences of the industry's seasoned consultants in establishing facility layouts, attraction mixes, lighting and theming. Reducing risk through effective planning and investment will be the key to success in the new millennium."

JUST LIKE THE MOVIES

Smith compares the current LBE market with that of the movie theater industry. Five years ago, he said, there were approximately 25,000 screens. Over the past five years, another 15,000 have been added, many with state-of-the-art amenities and stadium seating.

This has occurred, he said, without a commensurate increase in attendance at theaters, rendering older theaters obsolete. This is the primary reason, he explained, why most of the major theater companies are in bankruptcy proceedings.

"It's an investment problem, because you have to figure out what to do with older properties while newer and better properties come along," he explained. "It's the same thing with LBEs. If you have an older LBE that was built in 1990, and somebody comes into the market with year-2000 thinking, unless you've kept up with the market, you're probably at a competitive disadvantage."

Just as a theater with stadium seating will draw customers away from their local theater, he said, an ESPN Zone could do the same to a local arcade.

"You may not lose 50 percent of your sales, but in this market if you lose 10 percent of your sales, that's probably your profit," he warned. "It's easy to see that if you don't make profit you'll be out of business in a hurry."

How then, can a local arcade owner compete with multi-million dollar facilities?

Continuing the movie theater analogy, Smith said the key is to offer something that the major chains can't.

"Like a good local theater operator, you can offer value, or personalized service, or you can compete by adding elements together like bowling, laser tag or redemption," he said. "The key to surviving today is differentiating yourself in a given market, by either offering really excellent food, exceptional rides or attractions or exceptional value."

DAVID SLAYS GOLIATH

Despite the difficult climate, a number of local location owners have managed to thrive. Industry veteran Fred W. Beale, who owns Replay II Amusement Center in Weymouth, MA, is a prime example.

Over the past 10 years, Beale's 4,000-sq.-ft. center has managed to stay afloat while no less than 12 different competitors have gone out of business in the immediate area.

"I've survived them all," he said, crediting sound business practices and a willingness to offer what national chains can't for his long-term success. "My sales are up nine percent from last year, which is not too bad. "

Faced with intense competition, Beal has gone out of his way to offer his customers value, constantly adjusting prices to adapt to changing market conditions.

For $20, he offers customers 160 tokens and 200 tickets, a deal not easily matched by a national chain. Not surprisingly, the percentage of $20 bills taken in has risen from 28 percent to 65 percent since the promotion was put in place.

Rather than forcing people to pay $1 or more for one minute of play on an arcade game and wind up with a dissatisfied customer base, Beal's philosophy is to offer the best deal possible.

"It's like a rollercoaster: if the capacity is 36 people and you're charging $10 a ride and you're only riding eight people, why not charge $5 a ride and ride the whole 36," he explained. "The way I look at it is that the game is going to be there anyway, so it might as well be played."

Like many local location owners, Beal also works hard to maintain a loyal customer base. Last March, he created a computer database system on his own after deciding that he could do better than systems currently on the market.

The system allows him to distribute V.I.P. cards to guests free of charge. The cards helps redemption customers keep track of points, as well as allowing them to take advantage of specials and discounts, such as a 250 point bonus if a customer comes in on his or her birthday.

So far, the system has allowed Beal to build an impressive database of 4,200 customers, while approximately 10 million tickets have been issued over the same period.

"In order to survive today you have to build a customer base or you're going to be out of business," he said. "So far it's been a great success."

Beal also has no illusions about competing against national chains with super-deluxe video games. With the exception of a handful of simulators and driving games, the majority of the business (85 percent) is redemption.

Another strategy that Beal employs to separate himself from the competition is personal service. He regularly puts high-ticket items on layaway for loyal customers, which is rare.

"They appreciate that I'm willing to hold it for them," he said. "It also helps business as well, because I know they'll keep coming back."

LOCAL BRANDING

Another location owner who has stood the test of time is Marion Paul, who owns two FECs: Fannie Farkle's in Galtinburg, TN and Walking Charlie's in Daytona Beach, FL.

At each of her locations, Paul has made a concerted effort to offer something unique, a factor that hasn't been lost on her guests.

"A franchise is predictable and they tend to all look the same, whether you're in Los Angeles or Keokuk, Iowa," she said. "We're really selling our name and our personality, and setting a particular style that is like a mom-and-pop type of operation that is very unique."

Fannie Farkle's, she said, is famous for its homemade corndogs, so much so that people travel from 15 states just have a few, while Walking Charlie's features a plethora of driving games due to its proximity to the Daytona Speedway.

She must be doing something right, as Fannie Farkle's is currently enjoying its 21st season and Walking Charlie's is in its 19th season. Although neither faces direct competition from a national chain, both are located in resort areas, so it's safe to say that customers have experienced the high-end chains at some time or another.

"I get feedback all the time from people who travel all around who say they would love to have a Walking Charlie's or a Fannie Farkle's where they live," she said. "They like the fact that they are one-of-a-kind."

Both establishments place a strong emphasis on customer service, a strategy that Paul instills in her employees from day one.

"I train the staff to really appreciate the fact that the customers are the ones paying their paycheck, not me," she said. "If a particular customer is playing a game for an extended period of time, for example, a staff member will come over and offer a free beverage, rather than inconvenience them and have them get thirsty and leave."

Even something as simple as offering immaculate restrooms, she said, can help attract new customers.

"We spend a lot of money on restroom facilities, and about 70 percent of merchants in town send their customers to Fannie Farkle's to go to the bathroom because we offer one of the only public facilities in town. I know it sounds funny, but I'd say seven out of 10 come back."

Each year, Fannie Farkle's also hosts a "business after hours" for the local Chamber of Commerce. Last year, 120 people attended, exposing the location to even more potential customers.

In today's difficult business environment, Paul explained, making these types of efforts is a requirement.

"I think the whole thing starts with really deciding what type of personality you want to sell, and how you want to separate yourself from the competition," she said. "In my places, I try to be unique."